A bus goes past PetroVietnam's headquarters in Hanoi. The state still holds 97 percent of PetroVietnam Gas, a PetroVietnam unit. Investors are deterred by the size of the stakes being retained by the government, an analyst says. Photo: Reuters

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The benchmark VN-Index has jumped 24 percent this year as a stable economy and dividend yields almost 50 percent bigger than the regional average spurred foreign investors to boost holdings by US$218.7 million.

At the same time, the government raised less than half its target from initial public offerings this year through August 21, selling about VND2.23 trillion ($105.2 million) of shares in 33 state companies.

Money managers are avoiding IPOs amid concern the stocks are illiquid and stakes held by non-state shareholders are too small to influence corporate governance.

The lack of investor enthusiasm poses a challenge to Prime Minister Nguyen Tan Dung, who’s seeking to accelerate state asset sales after excessive borrowing by government-owned companies saddled the banking system with bad debt and helped drag economic growth to a 13-year low in 2012. A history of delayed IPOs is also giving investors pause.

“They have a big privatization program planned, but it hasn’t been implemented,” Mark Mobius, who oversees about $40 billion as the executive chairman at Templeton Emerging Markets Group, said from Seoul. Mobius, whose frontier-market fund had a 7.5 percent weighting in Vietnam shares as of June, said he’s not buying into the IPOs of state-owned firms at the moment.

The VN-Index rose 0.8 percent to 625.19 as of 9:40 a.m. local time, heading for the highest close since March 2008.

Rushed offerings

The state is hastening share offerings as part of efforts to restructure the nation’s economy and lure more international investors to a $58.6 billion stock market, the second-smallest among 16 Asia Pacific countries tracked by Bloomberg, after Sri Lanka.

Its plan to sell stakes in 432 enterprises by the end of next year prompted many companies to rush offerings, in some cases without even marketing them in advance.

The state is still “very far away from reaching IPO targets,” Tony Diep, Ho Chi Minh City-based managing director at Indochina Capital Corp., said by phone August 5.

In contrast, the IPO of the country’s first domestic exchange-traded fund doubled its target. VietFund Management raised about VND200 billion for the VFMVN30 fund, compared with an expected 100 billion, the company said on August 22.

Vietnam’s record of delayed listings isn’t helping its allure. Shares of Saigon Beer-Alcoho-Beverages Corp. still aren’t trading six years after its IPO, while stocks of JSC Bank for Foreign Trade of Vietnam, or Vietcombank, listed about 18 months after it sold shares in December 2007.

Vietnam Garment & Textile Co. delayed its IPO by two months this year after failing to lure investors, and Chief Executive Officer Tran Quang Nghi said it would take one to two years for shares to start trading.

Stalled listings

None of the 33 companies that sold shares so far this year have listed on local exchanges. Meanwhile, share prices of companies in other Southeast Asian countries that sold stock for the first time this year have risen an average of almost 20 percent, according to data compiled by Bloomberg.

Under rules that took effect in November, Vietnamese companies face fines if their shares don’t start trading within 12 months of a completed IPO. Still, the maximum penalty is only VND150 million ($7,075).

Investors are also deterred by the size of the stakes being retained by the government, according to Nguyen Thi Hoang Lan, deputy general director of the Hanoi Stock Exchange. The state still holds 97 percent of PetroVietnam Gas JSC, the country’s biggest listed company, and 77 percent of Vietcombank.

“For sectors in which the state doesn’t need a controlling share, the government should sell bigger stakes at IPOs to reduce their involvement in businesses,” Lan said. “Many investors don’t want to participate in share sales if they know they won’t be able to control or take part in the management of companies.”

Trading reform

In March, Prime Minister Dung said leaders at state-owned enterprises that fail to execute planned share sales, as well as ministers and provincial leaders that oversee those companies, must be held accountable.

The Ministry of Finance is seeking opinions for a draft measure on IPOs and listings, Lan said. Under the proposal, shares will be automatically deposited at the Vietnam Securities Depository right after an IPO.

They would then be traded either immediately on the UpCom, an official over-the-counter market managed by the Hanoi bourse, or on one of the two official exchanges within three months, she said.

“With all these measures, the privatization process will be boosted in the future,” Lan said.

Discouraging investors

“Most of the companies that sold shares to the public don’t have concrete plans for creating trading mechanisms for the stocks and that’s really discouraging investors, especially when the listed market is doing well,” said Mac Quang Huy, the Hanoi-based chief executive officer at Maritime Bank Securities. “No one wants to invest in companies if they aren’t sure when they can trade the stocks.”

Meanwhile, foreign funds have been adding to Vietnamese share holdings, heading for the ninth straight year of net purchases. The daily average value of stocks changing hands on the Ho Chi Minh exchange in the year through August 22 almost doubled compared with 2013 to about VND1.9 trillion, data compiled by Bloomberg show.

The VN-Index, the best performer among Southeast Asian markets this year, is valued at 13.7 times projected 12-month profits, the cheapest among the six major regional markets. The gauge’s trailing 12-month gross dividend yield is 3.82, compared with an average of 2.65 for the five other biggest Southeast Asian markets.

Mobius remains “bullish” on Vietnam, citing reasonable valuations, a growing economy and a high dividend yield. “It’s a very attractive and growing market,” he said. “There’s no reason why we wouldn’t want to increase” holdings.

Economic outlook

Vietnam’s economic growth quickened to 5.25 percent in the second quarter, from 5.09 percent three months earlier, while inflation held at less than 5 percent for a sixth month in July, compared with a peak of about 28 percent in August 2008.

Moody’s Investors Service raised the nation’s sovereign rating on July 29, citing an improving balance of payments and rising foreign-exchange reserves.

Meanwhile, the government is pushing ahead with stake-sale plans. National carrier Vietnam Airlines Corp., in which the state has been trying to sell shares since at least 2010, plans to conduct an IPO next month. Vinatex, which accounts for 15 percent of the country’s garment and textile exports, will hold its delayed offering on September 22.

“The government has some very attractive assets,” James Bannan, who runs the $110 million Frontier Markets Fund at Coeli AB in Sweden, wrote in an e-mail.

“But the investment community remains very skeptical because there has been lack of willingness for the government to modernize these companies and run them more professionally.”